Rendering Structured Finance Opinions of Counsel: Substantive Consolidation, Authority to File Bankruptcy, and More

Description

The key concept for structured finance is the isolation of the financed assets in a "bankruptcy remote" special purpose vehicle (SPV). SPVs are frequently formed as LLCs and statutory trusts, particularly Delaware Statutory Trusts. The basic concept is that, once the financed assets have been transferred to an SPV, purchasers of securities (whether debt or equity) issued by the SPV should no longer be concerned about the credit risks of the former owner of the financed assets (usually the entity that originated the financed assets), the entity that formed the SPV, or other affiliates of the entity that formed the SPV.

The isolation of the financed assets is achieved by two fundamental structuring techniques. First, the transfer of the financed assets to the SPV must be a "true sale." Second, the SPV itself must be "bankruptcy remote."

A true sale opinion is a reasoned analysis that addresses--but of course cannot establish--that the transfer of the financed assets is a transfer of the complete ownership in consideration of whatever the SPV pays to the transferor. The alternative would be the grant of a lien or security interest in the financed assets as collateral for a loan made by the SPV to the transferor.

A substantive non-consolidation opinion addresses--but of course cannot establish--that the bankruptcy of the parent entity of the SPV (and usually certain other affiliates) would not result in the substantive consolidation of the assets and liabilities of the SPV with those of the parent (and, if applicable, the other affiliates).

If the isolation of the financed assets is successful, then, for example, if the parent of the SPV were to enter bankruptcy, the parent's bankruptcy estate would own only the equity interest in the SPV and have no continuing interest in the financed assets. In other words, the SPV, and only the SPV, would be the owner of the financed assets, and therefore the purchasers of securities issued by the SPV would be unaffected by the bankruptcy of the SPV's parent (or, if a different party, the bankruptcy of the former owner of the financed assets).

Listen as our authoritative panel of practitioners discusses drafting opinions of counsel in structured finance transactions with particular emphasis on rendering true sale opinions and substantive non-consolidation opinions, and best practices for the opinion giver to minimize risks.